Question

Operating Leverage is calculated as ______________.

• A. Contribution $÷$ EBIT
• B. EBIT $÷$ PBT
• C. EBIT $÷$ Interest
• D. EBIT $÷$ Tax

Answer 1

The correct option is A Contribution $÷$ EBIT

Operating leverage is the measurement of degree to which a firm incurs a combination of fixed cost and variable cost. Operating leverage relates to the result of combination of fixed cost and variable cost. A company with greater proportion of fixed cost is said to be using more operating leverage.

Operating leverage can be calculated as:

DOL=Sales- Variable cost/Profit

=Contribution/EBIT

For example: Fixed Cost is Rs.780000, variable cost is Rs.8 per unit, Sales price is Rs.25 per unit, no of units sold 300000 units.

Particulars	Units	Rate P/Unit	Total
Sales	300000	25	7500000
Variable Cost	300000	8	2400000
Contribution			5100000
Fixed Cost			780000
EBIT/Profit			4320000

Financial Leverage=5100000/4320000

=1.18

It signifies that for every increase of 1% in sales, there will be an increase in EBIT by 1.18%.